A five-star ranking can be the making of the modern hotel or restaurant, recognizing excellence in accommodation and dining while also rewarding top-notch customer service. But five-star venues are often not those with the highest turnover or throughput of customers; a boutique country hotel, for example, may offer a far superior experience to the local chain hotel, but its capacity will usually be much smaller.
In foreign exchange trading, it now appears a similar chasm may have opened up between the top-tier global banks that have long dominated the industry in volume terms and the more niche providers that deliver superior service in particular currencies and for different client types. The Five-Star FX rankings recognize providers that scored high ratings across five qualitative areas of client service: State Street and Standard Chartered were the only two institutions to earn a star in each of those five areas, making them five-star global FX providers.
The star ranking further underlines that the growth strategy in foreign exchange the bank set itself several years ago is beginning to pay off. The strategy involved identifying internal champions for all of the geographies and products that may interest clients, so that credible information can be fed quickly to where it is needed most. The importance of local knowledge and expertise is not unique to Standard Chartered. It is probably the most recurrent theme across these rankings.
Every institution recognizes that while it might aspire to global coverage and dominant market share, deep knowledge of political and economic developments in individual countries cannot be skimped upon. Consistent pricing may be a differentiator for clients, but it is not the whole story. In an age of hour news coverage, social media and information overload, the role of research is often overlooked, but it is arguably now more important than ever.
In accessing complex or risky emerging markets, participants rely on their counterparties to deliver informed and prescient research to support their decision-making. Global banks often run central strategy desks that churn out research for particular regions, but it is those firms that are able to combine that content with on-the-ground expertise that differentiate themselves the most.
When a far-flung central bank suddenly raises interest rates or removes a currency floor, for example, portfolio managers need real-time commentary from economists in that market to predict what the impact may be and thereby inform their next steps.
A decision by the Argentinian government in December to lift currency controls was a case in point. By allowing the Argentine peso to float freely, then newly elected president Mauricio Macri sought to bolster economic growth, but the move sparked a sudden and sharp devaluation of the peso, which left participants in immediate need of informed market commentary.
Although it was not as globally destabilizing, the move awakened memories of the removal of the Swiss franc floor in , which caused gyrations in the FX market and widespread losses. With the recast Markets in Financial Instruments Directive Mifid II set to be implemented in Europe next year, research must now be unbundled from execution and delivered as a paid service in its own right. This will further underscore the importance of strong and credible analysis, as clients will only pay for content that will add value to their business.
Local expertise is not just about delivering timely and relevant research, however. Banks also need a strong grasp of the unique regulatory and political environment in every country in which they are active.
While there is no shortage of material available on regulatory changes in western jurisdictions, it becomes more complicated in emerging markets, where information is less readily available and clients often rely on their counterparties to tell them how business should be transacted locally.
Internal organization of teams is likely to be critical for those top-tier banks that want to provide the best possible service on a local basis.
Technology and execution expertise is also likely to be a differentiator for global banks because, while a regional player might have superior on-the-ground knowledge and experience, it is unlikely to have the same kind of technology budget or trading capabilities as a top-tier competitor.
Park suggests BAML gains similar advantages from its technology, and a global FX franchise also has the advantage of being able to internalize transactions where possible, he says, rather than trading them on the public market, thereby reducing market impact.
What clients want most is quick, fair and unbiased pricing with reliable liquidity. Whether trades are executed over an electronic channel or voice, we deliver what is best for the client. But these rankings show that important as technology and market impact may be, they do not preclude smaller, more niche providers from excelling locally.
Sun teams up with sales and traders to quickly provide clients with market updates and quickly fulfil their needs, which is important for corporate clients. We have six overseas branches and two subsidiaries, which means clients can access our pricing across the region and globally. For all of the banks that feature in the star rankings, the ultimate question they have had to ask themselves and their clients is: The answer inevitably varies depending on the region and institution concerned, but it is perhaps those banks that have failed to ask that question and act upon the answers that do not feature in the rankings.
State Street Global Markets has an exclusive partnership with PriceStats, an academic initiative spun out of MIT that provides high-frequency global inflation indices and insight into key macroeconomic variables. She believes this has been a differentiator for its support of alpha generation. State Street also works with clients to identify and manage risk in multiple ways. It has developed measures of market turbulence and systemic risk that it has found can be very beneficial in managing portfolios during times of high risk.
This is an example of where we have worked with academics to produce bespoke analysis that focuses on what our clients need. Critical as alpha generation and risk management may be, they must be combined with strong and credible pricing and execution capabilities. State Street provides hour client coverage to ensure constant access to liquidity and it has focused on emerging market pricing.
With three core pricing centres in London, Boston and Hong Kong, it also prices locally from its Korean and Taiwanese branches, which Hardeman believes has contributed to its five-star rating in Asia. In drawing conclusions from the star rankings, the core message seems to be that anything is possible. The diversity of banks that scored highly in particular regions shows that both regional and global institutions can earn recognition if they properly apply themselves to the needs of their clients and make sure they have a strong and informed local presence.
Banks that do not feature should perhaps address themselves more directly to their clients, asking them to rate their performance and tell them where they are losing out to competitors. The FX industry is unlikely to stand still over the next 12 months; further innovations and market developments will undoubtedly result in shifting client expectations.
As banks, we cannot be afraid of innovation and we have to be constantly creative or we will risk being disintermediated. Research — Including flow research, quantitative research and technical analysis. In each category, clients rank liquidity providers on a scale of one to seven, with one being the top and indicating exceptional quality in that area of service.
Scores are derived from these rankings by applying a numeric weighting of seven to a first-place ranking, six for second place, and so on. To determine the stars in each category, the average scores for each question earned by a qualifying bank in that category are totalled and divided by the number of questions in that category to achieve an equal-weighted average. The bank with the highest average score in each category receives a star. Euromoney's five-star FX providers Global: State Street Standard Chartered Africa:More...